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HMRC internal manual

Business Leasing Manual

Sale of lessor companies and similar arrangements: change of ownership: exceptions to qualifying change of ownership: election out of charge: restrictions on artificial losses or reduction in profits

Section 398E CTA2010

This guidance applies where the relevant day falls on or after 9 December 2009 and before 23 March 2011.

Section 398E prevents companies from reducing the taxable profits of the leasing business.

The legislation targets expenditure incurred by the company that has an unallowable purpose.

Expenditure has an unallowable purpose if the main purpose or one of the main purposes of the company in incurring the expenditure was to gain a relevant tax advantage.

A company obtains a relevant tax advantage if it reduces the profits, creates a loss or increases a loss of the leasing activity.

Expenditure can be capital or revenue in nature and so this section can encompass expenditure on plant or machinery that qualifies for capital allowances that are deducted in computing the profits of the leasing activity.

Where expenditure falls within these provisions the amount to be left out of account is determined on a just and reasonable basis.


A Ltd carries on a leasing activity and has elected out of the charge.

As part of its trade it leases plant or machinery in from X Ltd, a member of the acquiring group and leases that plant or machinery out to Y Ltd, also a member of the acquiring group.

Under the terms of the lease from X Ltd A Ltd pays higher rents n the first years of the lease. Under the terms of the lease to Y Ltd A Ltd is entitled to lower rents in the first years of the lease.

The arrangement will result in expenses exceeding income inside the ring fence while the income of X Ltd will exceed the expenses of Y Ltd outside the ring fence where group relief is available.